ABA Banking Journal - November 2007 - (Page 61)

gives them the protections that they want. All of this occurs under the umbrella of the statute and its specific provisions. The results of this process are often mixed. There is more consumer protection. There is enhanced safety and soundness. The goals of the statute are met. But do the resulting regulations really work? Too often, the answer is “no.” attention was always on how to comply with the statute. The process overlooked one critical element: the consumer for whose benefit these disclosures would be produced. What if we changed the approach and considered first what would be helpful to the consumer? If the purpose of Truth in Lending is to show the customer Rules fail because they focus on the statute Here is the fatal flaw in this process. The entire process looks backward at the statute rather than toward the statute’s goal of consumer protection. The result is regulatory burden not fully justified by the benefits. A disclosure designed to comply with the law may not be clear and informative for consumers. Focusing on the statute’s details fails to consider how to effectively communicate information. Nothing illustrated the weaknesses of this approach more powerfully than the Gramm-Leach-Bliley Act’s privacy regulations. While the regulations and disclosures carry out the mandates of the act, the disclosures are less than effective in communicating with the consumers they are designed to help. Truth in Lending isn’t far behind. How many consumers pick up a TIL disclosure, read it, and understand it? Almost no one except a lender or a regulator understands the difference between the loan amount on the face of the note and the “amount financed” on the TIL disclosure. The consumer is more likely to be confused than informed. The industry suffers from the same fatal flaw. When regulations are issued, banks focus on how to comply. The presumed goal of compliance is to avoid citations in the next examination. Attention is therefore given to doing what is required and doing it correctly. When the consumer asks what the “amount financed” means, too many loan officers respond that it is something that the government requires. They may even admit that they don’t understand it either. The result: confused customers, frustrated bankers, and examiners verify compliance by checkbox. How do we change this? Time to build a new box Traditional methods, such as a scrupulous item-by-item regulatory review, picking out the hardest things to do, hasn’t made a difference. The result is simply a slightly altered design for the same box. The only way we will ever really change anything is to change the box–to think outside the box, or even without the box. Both creditors and consumers have grown used to the Truth in Lending disclosures, but both have difficulty with them. The recent surge in predatory lending and deceptive marketing techniques has exposed the weaknesses of the disclosures—to say nothing of the weaknesses in consumer financial education. Consumers neither understand nor use the disclosures that lenders struggle—and spend—to give them. When Truth in Lending was “simplified” more than a quarter century ago, the project made major changes to the structure of the regulation and also made changes to the format of disclosures. For example, the regulation was re-organized to separate disclosure rules on open-end credit from closed-end credit disclosures. Prior to that time, all disclosures and concepts were grouped together in one obtuse regulation. But the focus of A Consumer Friendly Loan Disclosure You are borrowing $ at an interest rate of % You must make 360 monthly payments of $ to fully repay your loan. To borrow this amount, you must pay $ in up-front costs resulting in your effective use of $ This is the “amount financed.” You must also pay $ in interest over the life of the loan. The total of up-front costs and interest is $ This is your total finance charge. At the maturity of your loan, you will have paid a total of $ , your total payments. The schedule for your payments is: Number of Payments: Amount of Payments: When Payments Are Due: Your payment is comprised of: $ to principal and interest. $ paid into your escrow account for taxes. $ paid into your escrow account for insurance. $ for mortgage insurance. the cost of the credit, why not figure out the best way to do that? If the purpose of the privacy disclosure is to explain to customers what banks do with their information, why not focus on that? Then fit the result into the statutory requirements. The process could start with consideration of what customers want to know. Current TIL disclosures present the “amount financed” without any explanation, other than the little statutory blurb in fine print. Inevitably, consumers ask what the “amount financed” is. If the information were presented in a different way—the way consumers think—it could be more useful. We know that consumers look first to the amount they are borrowing and how much they will have to pay each month. They pay less attention to the amount financed and the total finance charge. And usually they only care about the first payment stream, leaving a huge opening for predatory lenders to create a deceptively reduced first payment. The next item they look to are the up-front costs. The two primary consumer questions are “Can I make the payments?” and “Can I pay the closing costs?” Disclosures that focus on these issues are more likely to be effective than disclosures that are centered on the obscure calculation of the amount financed. Why not put that information up at the top and organize it the way consumers think? What if Truth in Lending information was organized like the sample above? The staff of the Board of Governors of the Federal Reserve has ABA BANKING JOURNAL/NOVEMBER 2007 61

Table of Contents Feed for the Digital Edition of ABA Banking Journal - November 2007

ABA Banking Journal - November 2007 Contents Editor’s Column Briefing: Good News for Mortgages Sleight of Mind N.Y. Hiring Bonanza May Be Bane Snapshot: A Look at Held-For-Investment Loan Growth ABA Resources ABA Chairman’s Position “The Moose Bank” Thrives on Manufactured Housing Loans Finding the Middle Way for Your Bank’s Retirement Program Pass the Aspirin Cover Story: Self-Service Steps Up DIY U.K. Style Marketing to Millennials Getting Real With “Gen Wired” Ethnic Marketing: Disinterested Banking Getting Good at Global Sourcing Case in Point Turn Compliance on It's Head Banker’s Mart To Advertise/Index of Advertisers The Economy

ABA Banking Journal - November 2007

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